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Strong growth in Non-cotton seed portfolio

Highlights from Kaveri Seed Company’s Q3FY21 earnings: (1) Non-cotton portfolio i.e. hybrid rice seeds, selection rice seeds and maize seeds reported 58.3%, 13.5% and 52.5% revenue growth in 9MFY21, respectively, (2) Cotton business reported revenue decline of 2.5% and (3) Kaveri continues to introduce new products backed by strong R&D. It is helping Kaveri improve realizations as well as margins. We remain positive on Kaveri with the success of non-cotton seeds and its market share gains in cotton seeds in states like Gujarat and Haryana. Success of these initiatives will de-risk the current business model centred around cotton seeds in South India. The stock is at an attractive price with its valuation below mean P/E-1 SD, and FCF yield of 9% on FY21E. Maintain BUY with DCF-based TP of Rs710 (10x FY23E).

* Q3FY21 result: Kaveri reported revenue and EBITDA decline of 2.8% and 2.2%, respectively. However, adjusted PAT was up 7.4% YoY. EBITDA margin was unchanged at 8.6% YoY. While cotton seed volumes were stable in 9MFY21, there is strong 34% revenue growth in non-cotton seeds.

* Segmental performance: Revenues of cotton seeds declined 2.5% in 9MFY21. Revenue of hybrid rice, maize and selection rice seeds were up 58.3%, 13.5% and 52.5%, YoY, respectively. There was ~3% higher sowing during Rabi season which also helped Kaveri report strong numbers. Higher revenue growth in premium products boosted realisations. Vegetable seed revenue was up 114%. The rise was largely driven by growth in seeds of hot pepper, tomato, gourds and okra.

* Steady launches of new products: Revenue contribution of new products has increased from 24.55% in 9MFY20 to 27.2% in 9MFY21. The company is intruding new products across all the segments i.e. cotton, maize, vegetables and rice. We believe steady launches will allow the company to improve realizations and margins.

* Multi-pronged growth approach: Kaveri is working towards the dual objectives of expanding product portfolio and geographical presence. It has entered West and North India to sell cotton seeds. It has also commenced exports to five countries. We note Kaveri has launched multiple variants of rice (selection + hybrid), maize and vegetable seeds. Success of these initiatives will create new growth avenues and de-risk the current business model centered around cotton seeds in South India.

* Maintain BUY: Kaveri has created strong value (FCF) over the past decade and we remain positive on medium-term growth outlook. We model the company to report revenue and PAT CAGRs of 12.8% and 17.7%, respectively, over FY20-FY23. We value the stock on DCF-based target price of Rs710, implying a target P/E of 10x FY23E. The stock is at an attractive FCF yield of 9% for FY21E.

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